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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________to___________
Commission File No.: 0-32113
RESOURCES CONNECTION, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0832424
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
695 Town Center Drive, Suite 600 92626
Costa Mesa, California (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (714) 430-6400
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par Value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of July 16, 2001, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $329,459,551 (based upon the
closing price for shares of the Registrant's common stock as reported by The
Nasdaq National Market). As of July 16, 2001, there were approximately
20,893,305 shares of common stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Page
----
PART I
Item
----
1. Business...................................................................... 1
2. Properties.................................................................... 10
3. Legal Proceedings............................................................. 10
4. Submission of Matters to a Vote of Security Holders........................... 10
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters............................................... 11
6. Selected Financial Data....................................................... 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 13
7A. Quantitative and Qualitative Disclosures about Market Risk.................... 25
8. Financial Statements and Supplementary Data................................... 26
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 51
PART III
10. Directors and Executive Officers of the Registrant............................ 52
11. Executive Compensation........................................................ 54
12. Security Ownership of Certain Beneficial Owners and Management................ 62
13. Certain Relationships and Related Transactions................................ 63
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 67
In this Report on Form 10-K, "Resources Connection," "company," "we," "us"
and "our" refer to the business of Resources Connection LLC for all periods
prior to the sale of Resources Connection LLC by Deloitte & Touche LLP, and to
Resources Connection, Inc. and its subsidiaries for all periods after the sale.
References to "Deloitte & Touche" refer to Deloitte & Touche LLP. References in
this prospectus to "fiscal," "year" or "fiscal year" refer to our fiscal years
that consist of the 52- or 53-week period ending on the Saturday in May closest
to May 31.
This Report on Form 10-K, including information incorporated herein by
reference, contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements relate to expectations
concerning matters that are not historical facts. Such forward-looking
statements may be identified by words such as "anticipates," "believes," "can,"
"continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "predicts," "should," or "will" or the negative of these terms or
other comparable terminology. These statements and all phases of our operations
are subject to known and unknown risks, uncertainties and other factors, some of
which are identified herein and in our Form S-1 filed with the Securities and
Exchange Commission on July 17, 2001 (File No. 333-65272). Readers are cautioned
not to place undue reliance on these forward-looking statements. Our actual
results, levels of activity, performance or achievements and those of our
industry may be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these forward-
looking statements. We undertake no obligation to update the forward-looking
statements in this filing. References in this filing to "Resources Connection,"
the "Company," "we," "us," and "our" refer to Resources Connection, Inc. and its
subsidiaries.
The Company's principal executive offices are located at 695 Town Center
Drive, Suite 600, Costa Mesa, California 92626. The Company's telephone number
is (714) 430-6400 and its web site address is
http://www.resourcesconnection.com. The information set forth in the web site
does not constitute part of this Report on Form 10-K.
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PART I
Item 1. Business
Overview
Resources Connection is a professional services firm that provides
experienced accounting and finance, human resources management and information
technology professionals to clients on a project-by-project basis. We assist
our clients with discrete projects requiring specialized professional expertise
in accounting and finance, such as mergers and acquisitions due diligence,
financial analyses (e.g., product costing and margin analyses) and corporate
reorganization and tax-related projects. In addition, we provide human
resources management services, such as compensation program design and
implementation, and information technology services, such as transitions of
management information systems. We also assist our clients with periodic needs
such as budgeting and forecasting, audit preparation and public reporting.
We were founded in June 1996 by a team at Deloitte & Touche, led by our
current chief executive officer, Donald B. Murray, who was then a senior partner
with Deloitte & Touche. Our other founding members include our current chief
financial officer, Stephen J. Giusto, then also a partner, Karen M. Ferguson,
the current managing director of our New York area practice, and David L.
Schnitt, our former national director of information technology services. Our
founders created Resources Connection to capitalize on the increasing demand for
high-quality, outsourced professional services. We operated as a division of
Deloitte & Touche from our inception in June 1996 until January 1997. From
January 1997 until April 1999, we operated as an independent subsidiary of
Deloitte & Touche. During these periods due to regulatory constraints
applicable to us as part of a Big Five accounting firm, we were unable to
provide certain accounting services to audit clients of Deloitte & Touche. In
April 1999, we completed a management-led buyout. Subsequent to the management-
led buyout, we were able to expand the scope of services we provide to our
clients.
Our business model combines the client service orientation and commitment
to quality of a Big Five accounting firm with the entrepreneurial culture of an
innovative, high-growth company. We are positioned to take advantage of what we
believe are two converging trends in the outsourced professional services
industry: increasing demand for outsourced professional services by corporate
clients and increasing supply of professionals interested in working on an
outsourced basis. We believe our business model allows us to offer challenging
yet flexible career opportunities, attract highly qualified, experienced
professionals and, in turn, attract clients.
As of May 31, 2001, we employed more than 1,250 professional service
associates on assignment. Our associates have professional experience in a wide
range of industries and functional areas. Based upon an internal, annual survey
conducted in late calendar year 2000, to which approximately 53% of all active
associates responded, 52% of respondents were CPAs, 35% had MBAs, and the
average years of professional experience was 20. We offer our associates careers
that combine the flexibility of project-based work with many of the advantages
of working for a traditional professional services firm.
We have established a growing and diverse client base of over 1,800
clients, ranging from large corporations to mid-sized companies to small
entrepreneurial entities, in a broad range of industries. For example, our
clients include more than half of the Fortune 100, which accounted for
approximately 10.9% of our revenues in fiscal 2001, and all of the Big Five
accounting firms. We serve our clients through 41 offices in the United States
and four offices abroad. We have grown revenues internally from $9.3 million in
fiscal 1997 to $189.8 million in fiscal 2001, a four-year CAGR of 112% and our
income from operations over the same period has increased from $869,000 to $25.8
million, a four-year CAGR of 134%. We have been profitable every year since our
inception.
We believe our distinctive culture is a valuable asset and is in large part
due to our management team, which has extensive experience in the professional
services industry. Virtually all of our senior management and office directors
have Big Five experience and all of our management has an equity interest in our
company. This team has created a culture of professionalism that we believe
fosters in our associates a feeling of personal responsibility for, and pride
in, client projects and enables us to deliver high-quality service to our
clients.
-1-
Industry Background
Increasing Demand for Outsourced Professional Services
According to a study by Staffing Industry Analysts, Inc., the market for
outsourcing of professionals, including information technology, accounting and
finance, technical/engineering, medical and legal professionals, is large and
growing, with revenues estimated to grow from $40.1 billion in 1999 to $58.6
billion in 2002, representing a CAGR of 13.5%. Accounting and finance
professionals, according to the same study, represent one of the fastest growing
segments of this market, with revenues estimated to grow from $7.2 billion in
1999 to $13.6 billion in 2002, representing a CAGR of 23.6%. We believe, based
on discussions with our clients, this growth is driven by the recognition that
by outsourcing professionals companies can:
. strategically access specialized skills and expertise;
. effectively supplement internal resources;
. increase labor flexibility; and
. reduce their overall hiring and training costs.
Typically, companies use a variety of alternatives to fill their project-
based professional services needs. Companies outsource entire projects to
consulting firms, which provides access to the expertise of the firm but often
entails significant cost and less management control of the project. Companies
also supplement their internal resources with employees from the Big Five
accounting firms; however, these arrangements are on an ad hoc basis and have
been increasingly limited by regulatory concerns. Companies use temporary
employees from traditional and Internet-based staffing firms, who may be less
experienced or less qualified than employees of professional services firms.
Finally, some companies rely solely on their own employees who may lack the
requisite time, experience or skills.
Increasing Supply of Project Professionals
Concurrent with the growth in demand for outsourced professional services,
we believe, based on discussions with our associates, that the number of
professionals seeking to work on a project basis has increased due to a desire
for:
. more flexible hours and work arrangements, coupled with competitive
wages and benefits and a professional culture;
. challenging engagements that advance their careers, develop their
skills and add to their experience base; and
. a work environment that provides a diversity of, and more control
over, client engagements.
The employment alternatives historically available to professionals may
fulfill some, but not all, of an individual's career objectives. A professional
working for a Big Five accounting firm or a consulting firm may receive
challenging assignments and training, but may encounter a career path with less
flexible hours and limited control over work engagements. Alternatively, a
professional who works as an independent contractor faces the ongoing task of
sourcing assignments and significant administrative burdens.
Resources Connection Solution
Resources Connection is positioned to capitalize on the confluence of these
industry trends. We believe, based on discussions with our clients, that
Resources Connection provides clients seeking outsourced professionals with
high-quality services because we are able to combine all of the following:
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. a relationship-oriented approach to assess our clients' project needs;
. highly qualified professionals with the requisite skills and
experience;
. competitive rates on an hourly, instead of a per project, basis; and
. significant client control of their projects.
Resources Connection Strategy
Our Business Strategy
We are dedicated to providing highly qualified and experienced accounting
and finance, human resources management and information technology professionals
to meet our clients' project-based and interim professional services needs. Our
objective is to be the leading provider of these outsourced professional
services. We have developed the following business strategies to achieve this
objective:
. Hire and retain highly qualified, experienced associates. We believe
our highly qualified, experienced associates provide us with a
distinct competitive advantage. Therefore, one of our priorities is to
continue to attract and retain high-caliber associates. We believe we
have been successful in attracting and retaining qualified
professionals by providing challenging work assignments, competitive
compensation and benefits, and continuing education and training
opportunities, while offering flexible work schedules and more control
over choosing client engagements.
. Maintain our distinctive culture. Our corporate culture is central to
our business strategy and we believe has been a significant component
of our success. Our senior management, virtually all of whom are Big
Five alumni, has created a culture that combines the commitment to
quality and the client service focus of a Big Five accounting firm
with the entrepreneurial energy of an innovative, high-growth company.
We seek associates and management with talent, integrity, enthusiasm
and loyalty to strengthen our team and support our ability to provide
clients with high-quality services. We believe that our culture has
been instrumental to our success in hiring and retaining highly
qualified associates and, in turn, attracting clients.
. Build consultative relationships with clients. We emphasize a
relationship-oriented approach to business rather than a transaction-
or assignment-oriented approach. We believe the professional services
experience of our management and associates enables us to understand
the needs of our clients and to deliver an integrated, relationship-
oriented approach to meeting their professional services needs. We
regularly meet with our existing and prospective clients to understand
their businesses and help them define their project needs. Once a
project is defined, we identify associates with the appropriate skills
and experience to meet the client's needs. We believe that by
partnering with our clients to solve their professional services
needs, we can generate new opportunities to serve them. The strength
of our client relationships is demonstrated by the fact that 47 of our
top 50 clients in fiscal 2000 remained clients in fiscal 2001.
. Build the Resources Connection brand. Our objective is to establish
Resources Connection as the premier provider of project-based
professional services. Our primary means of building our brand is by
consistently providing high-quality, value-added services to our
clients. We have also focused on building a significant referral
network through our more than 1,250 associates on assignment and 290
management employees, most of whom have established relationships with
a number of potential clients. In addition, we have ongoing national
and local marketing efforts that reinforce the Resources Connection
brand.
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Our Growth Strategy
All of our growth since inception has been internal. We believe we have
significant opportunity for continued strong internal growth in our core
business and will evaluate potential strategic acquisitions on a case-by-case
basis. Key elements of our growth strategy include:
. Expanding work from existing clients. A principal component of our
strategy is to secure additional project work from the more than
1,800 clients we served in fiscal 2001. Prior to the management-led
buyout, we were unable to provide certain services to some of our
clients due to regulatory constraints applicable to us as part of a
Big Five accounting firm. Subsequent to the management-led buyout, we
were able to expand the scope of the services we provide to our
clients. We believe, based on discussions with our clients, that the
amount of revenue we currently receive from most of our clients
represents a relatively small percentage of the amount they spend on
outsourced professional services, and that, consistent with industry
trends, they will continue to increase the amount they spend on these
services. We believe that by continuing to deliver high-quality
services and by further developing our relationships with our clients,
we will capture a significantly larger share of our clients'
expenditures for outsourced professional services.
. Growing our client base. We will continue to focus on attracting new
clients. Since fiscal 1999, we increased our client base by more than
600 new clients. We plan to develop new client relationships
primarily by leveraging the significant contact networks of our
management and associates and through referrals from existing clients.
In addition, we believe we will attract new clients by building our
brand name and reputation and through our national and local marketing
efforts.
. Expanding geographically. We plan to expand geographically to meet the
demand for outsourced professional services. We expect to add to our
existing domestic office network with new offices strategically
located to meet the needs of our existing clients and to create
additional new client opportunities. We believe that there are also
significant opportunities to grow our business internationally and,
consequently, we intend to expand our international presence on a
strategic and opportunistic basis.
. Providing additional professional services lines. We will continue to
explore, and consider entry into, new professional services lines.
Since fiscal 1999, we have diversified our professional services lines
by entering into the human resources management and the information
technology segments. Our considerations when evaluating new
professional services lines include growth potential, profitability,
cross-marketing opportunities and competition.
Associates
We believe that an important component of our success over the past four
years has been our highly qualified and experienced associates. As of May 31,
2001, we employed over 1,250 associates on assignment. Our associates have
professional experience in a wide range of industries and functional areas. We
provide our associates with challenging work assignments, competitive
compensation and benefits, and continuing education and training opportunities,
while offering flexible work schedules and more control over choosing client
engagements.
Our associates are employees of Resources Connection. We pay each
associate an hourly rate, pay overtime, and offer benefits, including paid
vacation and holidays; referral bonus programs; group health and basic term
life insurance programs, each with an approximate 50% contribution by the
associate; a matching 401(k) retirement plan; and professional development and
career training. Typically, an associate must work a threshold number of hours
to be eligible for all of the benefits. We also have a long-term incentive plan
for our associates, which affords them the opportunity to earn an annual cash
bonus that vests over time. We intend to maintain competitive compensation and
benefit programs.
4
Clients
We provide our services to a diverse client base in a broad range of
industries. In fiscal 2001, we served over 1,800 clients. Our revenues are not
concentrated with any particular client or clients, or within any particular
industry. In fiscal 2001, no single client accounted for more than 3% of our
revenue and the top 10 clients accounted for approximately 15.4% of our
revenues.
The clients listed below represent the geographic and industry diversity of
our client base in fiscal 2001.
Air BP, a subsidiary of BP Amoco Kaiser Permanente Insurance Company
Allied Waste The LTV Corporation
Aventis Pharmaceuticals Nordstrom
Banc of America Securities LLC PepsiCo Inc.
Blue Shield of California Pharmacia Corporation
CB Richard Ellis Southwest Airlines
Credit Suisse First Boston Corporation Toshiba America Electronic Components, Inc.
Exelon Corporation Toyota Motor Sales, USA, Inc.
Great West Life and Annuity Life Insurance Company UCLA Medical Center
Services
Our current professional services capabilities include accounting and
finance, human resources management and information technology. In fiscal 2001,
our revenue from providing accounting and finance services accounted for a
substantial majority of our revenue. Our engagements are project-based and often
last three months or longer.
Accounting and Finance
Our accounting and finance services include:
Special Projects: Our accounting and finance associates work on a variety
of special projects including:
. financial analyses, such as product costing and margin analyses;
. tax-related projects, such as tax compliance and analysis of tax
liabilities resulting from acquisitions; and
. resolving complex accounting problems, such as large out-of-balance
accounts and unreconciled balances.
Sample Engagement: We provided two associates over a 14-month period
to assist the global operations and finance group of a major bank in
establishing a cash management system that would be used to monitor its
daily cash needs in U.S. dollars and various foreign currencies. Our
associates were responsible for:
. reviewing the daily trades of foreign securities and projecting the
surplus/shortfall for the various currencies resulting from these
trades;
. recommending transfers, purchases of foreign currencies and
borrowings; and
. redesigning and testing systems to accurately report foreign currency
activities.
5
Mergers and Acquisitions: Our accounting and finance associates have
assisted with the following functions for clients involved in mergers and
acquisitions:
. due diligence work;
. integration of financial reporting and accounting systems; and
. public reporting filings associated with the transaction.
Sample Engagement: We have provided more than 50 associates to assist
with the post-acquisition integration of a multi-billion dollar solid waste
management company. Our services were delivered through 19 of our offices
with coordination provided by one of our offices. We assigned a specially
designated project manager to oversee the delivery of our services, thereby
facilitating project management and client control. Our associates were
responsible for:
. performing controller responsibilities at various sites,
including preparing internal financial statements, closing the
general ledger and managing the accounting staff;
. restructuring the fixed asset reporting system;
. assisting with the transition of financial functions during the
divestiture of solid waste facilities and closing of other
facilities;
. assisting with converting the newly acquired facilities' systems
to the parent's systems; and
. preparing fuel tax returns and related tax schedules.
Finance and Accounting System Implementation and Conversion: When a
company implements a new system, the conversion often entails additional work
that burdens management's time. To address this problem, we provide associates
that:
. assist with the finance and accounting issues of system
implementations; and
. maintain daily operations during the implementation and conversion
process in order to minimize disruption to the organization.
Sample Engagement: We provided 15 associates over a 14-month period
to assist one of the world's largest energy groups in converting to a new
proprietary accounting software system through operations worldwide,
developing the relevant required software documentation and relocating its
accounting and commercial services departments between two metropolitan
areas. Our associates were responsible for:
. documenting and preparing a flowchart of the accounting system
and existing business processes, practices and workflows;
. reviewing internal controls and developing an operations manual;
. documenting the new accounting system processes and procedures;
. performing pre- and post-conversion testing;
. hiring and training new employees; and
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. designing training programs.
Periodic Accounting and Finance Needs: Our associates help clients with
periodic needs such as:
. interim senior financial management, including controller or
accounting manager tasks;
. monthly/quarterly/year-end closings;
. audit preparation;
. public reporting; and
. budgeting and forecasting.
Sample Engagement: We provided 40 associates over a 19-month period
to assist a multi-unit medical company, currently under reorganization,
with a comprehensive review and clean-up of the company's consolidated
balance sheet in preparation for its year-end audit. Our associates were
responsible for:
. designing a work program and package format to be used by 23
associates in teams across six states;
. completing a detailed review of approximately 180 entities'
balance sheets, compiling documentation, and obtaining support
for the entire trial balance; and
. proposing adjusting entries and recommending subsequent internal
accounting control system and procedure changes.
Assist Start-Ups: We provide accounting and finance professional services
to start-up companies who do not yet have the appropriate management or staff to
support their accounting and finance functions.
Sample Engagement: We have provided two associates over a nine-month
period to assist an Internet incubator that provides services to start-up
companies in setting up its accounting function. Our associates were
responsible for:
. designing a scalable general ledger system to accommodate
multiple entities;
. setting up the accounts payable system for all entities including
check disbursements and wire transfers of funds;
. designing a system for processing semi-monthly payroll;
. developing cash receipts function including the performance of
all treasury functions (collections, deposits, investments); and
. creating a model for projecting cash flows from individual
entities.
Human Resources Management
Our human resources management professional services group was formed in
June 1999. These services are currently available in 19 of our offices. Our
human resources management services include:
. development of human resources management procedures, training and
policies;
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. compensation program design and implementation;
. interim senior human resources management; and
. assistance in complying with governmental employment regulations.
Sample Engagement: We have provided three associates over a three-
month period to assist a leading provider of business information and
related products and services with a number of projects. Our associates
were responsible for:
. evaluating the existing human resources information system, or
HRIS;
. reviewing vendors and implementing a new HRIS system;
. updating human resources policies and procedures to reflect
consistent corporate policies across numerous acquired companies;
and
. evaluating the various retirement benefits for each of the
multiple subsidiaries and acquired companies.
Information Technology
Our information technology professional services group was formed in June
1998. These services are currently available in 16 of our offices. Our
information technology services include:
. providing interim information technology management such as interim
chief technology officers and chief information officers;
. leading systems selection process; and
. assisting with project management of information systems
implementations, conversions and upgrades.
Sample Engagement: We provided an interim chief information officer
with significant foodservice operations/restaurant experience over a 21-
month period to support a rapidly growing chain of upscale restaurants with
106 locations in 22 states. Our associate was responsible for:
. designing technology initiatives;
. establishing and maintaining an information technology department
capable of supporting and delivering technology solutions;
. monitoring and guiding multiple project teams;
. communicating with various business units; and
. prioritizing projects and resources.
Operations
We generally provide our professional services to clients at a local level
through our 41 domestic offices and four international offices, with the
oversight and consultation of our corporate management team located in our
corporate service center. The office director and client service manager in
each office are responsible for initiating client relationships, providing
associates specifically skilled to perform client projects, ensuring client
satisfaction
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throughout engagements and maintaining client relationships post-engagement.
Throughout this process, the corporate management team is available to consult
with the office director with respect to client services.
Our offices are operated in a decentralized, entrepreneurial manner. Our
office directors are given significant autonomy in the daily operations of their
respective offices, and with respect to such offices, are responsible for
overall guidance and supervision, budgeting and forecasting, sales and
marketing, pricing and hiring. We believe that a substantial portion of the
buying decisions made by our clients are made on a local or regional basis and
that our offices most often compete with other professional services providers
on a local or regional basis. Because our office directors are in the best
position to understand the local and regional outsourced professional services
market and because clients often prefer local providers, we believe that a
decentralized operating environment maximizes operating performance and
contributes to employee and client satisfaction.
We believe that our ability to successfully deliver professional services
to clients is dependent on our office directors working together as a collegial
and collaborative team, at times working jointly on client projects. To build a
sense of team effort and increase camaraderie among our office directors, we
have an incentive program for our office management that awards annual bonuses
based on both the performance of the company and the performance of the
manager's particular office. In addition, each member of our office management
owns equity in our company. We also have a management mentor program whereby
each new office director is trained by an experienced office director, who is
responsible for providing support to the new office director on an ongoing
basis.
From our corporate headquarters in Costa Mesa, California, we provide our
offices with centralized administrative, marketing, finance and legal support.
Our financial reporting is centralized in our corporate service center. This
center also handles billing, accounts payable and accounts receivable, and
administers human resources including employee compensation and benefits. In
addition, we have a corporate networked information technology platform with
centralized financial reporting capabilities and a front office client
management system. These centralized functions minimize the administrative
burdens on our office management and allow them to spend more time focused on
client development.
Business Development
Our business development initiatives are composed of:
. local sales initiatives focused on existing clients and target
companies;
. brand marketing activities; and
. national and local direct mail programs.
Our business development efforts are driven by the networking and sales
efforts of our management. The office director and client service manager in
each of our offices develop a list of targeted potential clients and key
existing clients. They are responsible for initiating and fostering
relationships with the senior management of these companies. These local
efforts are supplemented with national marketing assistance. We have a national
business development director who, with our top executives, assists with major
client opportunities. We believe that these efforts have been effective in
generating incremental revenues from existing clients and developing new client
relationships.
Our brand marketing initiatives help develop Resources Connection's image
in the markets we serve. Our brand is reinforced by our professionally designed
website, brochures and pamphlets, direct mail and advertising materials. We
believe that our branding initiatives coupled with our high-quality client
service differentiate us from our competitors and establish Resources Connection
as a credible and reputable professional services firm.
Our national marketing group develops our direct mail campaigns to focus on
our targeted client and associate populations. These campaigns are intended to
support our branding, sales and marketing, and associate hiring initiatives.
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Competition
We operate in a competitive, fragmented market and compete for clients and
associates with a variety of organizations that offer similar services. Our
principal competitors include:
. consulting firms;
. loaned employees of the Big Five accounting firms;
. traditional and Internet-based staffing firms; and
. the in-house resources of our clients.
We compete for clients on the basis of the quality of professionals, the
timely availability of professionals with requisite skills, the scope and price
of services, and the geographic reach of services. We believe that our
attractive value proposition, consisting of our highly qualified associates,
relationship-oriented approach and professional culture, enables us to
differentiate ourselves from our competitors. Although we believe we compete
favorably with our competitors, many of our competitors have significantly
greater financial resources, generate greater revenues and have greater name
recognition than our company.
Employees
As of May 31, 2001, we had a total of 1,573 employees, including 290
corporate and office-level employees and 1,283 professional services associates.
None of our employees is covered by a collective bargaining agreement.
Item 2. Properties
We maintain a total of 41 domestic offices, which are respectively located
in the following metropolitan areas:
Phoenix, Arizona Boise, Idaho Cincinnati, Ohio
Costa Mesa, California Chicago, Illinois (2 locations) Cleveland, Ohio
Los Angeles, California Indianapolis, Indiana Portland, Oregon
Santa Clara, California Boston, Massachusetts Philadelphia, Pennsylvania
San Diego, California Baltimore, Maryland Pittsburgh, Pennsylvania
San Francisco, California Detroit, Michigan Austin, Texas
Denver, Colorado Minneapolis, Minnesota Dallas, Texas
Hartford, Connecticut St. Louis, Missouri Fort Worth, Texas
Stamford, Connecticut Las Vegas, Nevada Houston, Texas (2 locations)
Orlando, Florida Parsippany, New Jersey San Antonio, Texas
Tampa, Florida Princeton, New Jersey Seattle, Washington
Atlanta, Georgia New York, New York Milwaukee, Wisconsin
Honolulu, Hawaii Charlotte, North Carolina Washington, D.C.
Our corporate offices are located in the Costa Mesa, California office in a
16,366 square foot facility under a lease expiring in June 2007. We maintain
four international offices: Toronto, Canada; London, England; Taipei, Taiwan;
and Hong Kong, People's Republic of China.
Item 3. Legal Proceedings
We are not currently subject to any material legal proceedings; however, we
may from time to time become a party to various legal proceedings arising in the
ordinary course of our business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2001.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our common stock has traded on The Nasdaq National Market under the symbol
"RECN" since December 15, 2000. Prior to that time, there was no public market
for our common stock. The approximate number of holders of record of our common
stock as of May 31, 2001 was 202.
The following table sets forth the range of high and low sales prices
reported on The Nasdaq National Market for our common stock for the periods
indicated.
Price Range of Common Stock
----------------------------------
High Low
--------------- -----------------
Fiscal 2001:
Third Quarter (December 15, 2000 through February 24, 2001) $25.375 $13.437
Fourth Quarter $33.800 $16.625
Fiscal 2002:
First Quarter (through July 16, 2001) $34.250 $22.875
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and do not anticipate paying any cash dividends in
the foreseeable future. Our credit agreement currently prohibits us from
declaring or paying any dividends or other distributions on any shares of our
capital stock other than dividends payable solely in shares of capital or the
stock of our subsidiaries. Any future determination to pay cash dividends will
be at the discretion of our board of directors and will depend upon our
financial condition, results of operations, capital requirements, general
business condition, contractual restrictions contained in our credit agreement
and other agreements, and other factors deemed relevant by our board of
directors.
Item 6. Selected Financial Data
You should read the following selected historical consolidated financial
data in conjunction with our consolidated financial statements and related notes
beginning on page 26 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on page 13. The statement of
income data for the year ended May 31, 1997, and the balance sheet data at May
31, 1997 were derived from the unaudited financial statements of Resources
Connection LLC and are not included in this Report on Form 10-K. The statements
of income data for the year ended May 31, 1998, and the period from June 1, 1998
to March 31, 1999, and the balance sheet data at May 31, 1998 were derived from
the financial statements of Resources Connection LLC that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and, with respect to the
statement of income data for the period from June 1, 1998 to March 31, 1999, is
included elsewhere in this Report on Form 10-K. The consolidated statements of
income data for the period from November 16, 1998 to May 31, 1999, and the years
ended May 31, 2000 and 2001, and the consolidated balance sheet data at May 31,
1999, 2000 and 2001 were derived from our consolidated financial statements that
have been audited by
11
PricewaterhouseCoopers LLP and, with respect to the consolidated statements of
income data, and the consolidated balance sheet data at May 31, 2000 and 2001,
are included elsewhere in this Report on Form 10-K. Historical results are not
necessarily indicative of results that may be expected for any future periods.
Resources Connection LLC
--------------------------------------------------
Period from
Year Ended Year Ended June 1, 1998 to
May 31, 1997 May 31, 1998 March 31, 1999
-------------- ------------ ---------------
(unaudited)
(dollar amounts in thousands, except per share data)
Consolidated Statements of Income Data:
Revenue..................................................... $9,331 $29,508 $55,438
Direct cost of services..................................... 5,367 16,671 31,253
------ ------- -------
Gross profit................................................ 3,964 12,837 24,185
Selling, general and administrative expenses................ 3,086 9,035 17,071
Amortization of intangible assets........................... -- -- --
Depreciation expense........................................ 9 79 118
------ ------- -------
Income from operations...................................... 869 3,723 6,996
Interest income............................................. -- -- --
Interest expense............................................ -- -- --
------ ------- -------
Income before provision for income taxes and extraordinary
charge..................................................... 869 3,723 6,996
Provision for income taxes.................................. -- -- --
------ ------- -------
Income before extraordinary charge.......................... 869 3,723 6,996
Extraordinary charge, net of tax effect of $381............. -- -- --
------ ------- -------
Net income.................................................. $ 869 $ 3,723 $ 6,996
====== ======= =======
Pro Forma Data(1):
Income before provision for income taxes.................... $ 869 $ 3,723 $ 6,996
Pro forma provision for income taxes........................ 348 1,489 2,798
------ ------- -------
Pro forma net income........................................ $ 521 $ 2,234 $ 4,198
====== ======= =======
Net income per common share:
Basic before extraordinary charge.........................
Extraordinary charge......................................
Basic.....................................................
Diluted before extraordinary charge.......................
Extraordinary charge......................................
Diluted...................................................
Number of shares used in computing net income per share
(in thousands):
Basic.....................................................
Diluted...................................................
Other Data:
Number of offices open at end of period..................... 9 18 27
Total number of associates on assignment at end of period... 127 326 675
Resources Connection, Inc.
------------------------------------------------------
Period from
November 16, 1998 Year Ended Year Ended
to May 31, 1999 May 31, 2000 May 31, 2001
---------------- -------------- -------------
(dollar amounts in thousands, except per share data)
Consolidated Statements of Income Data:
Revenue..................................................... $15,384 $126,332 $189,752
Direct cost of services..................................... 8,618 73,541 110,811
------- -------- --------
Gross profit................................................ 6,766 52,791 78,941
Selling, general and administrative expenses................ 4,274 34,648 49,964
Amortization of intangible assets........................... 371 2,231 2,273
Depreciation expense........................................ 30 285 866
------- -------- --------
Income from operations...................................... 2,091 15,627 25,838
Interest income............................................. -- -- (633)
Interest expense............................................ 734 4,717 2,676
------- -------- --------
Income before provision for income taxes and extraordinary
charge..................................................... 1,357 10,910 23,795
Provision for income taxes.................................. 565 4,364 9,518
------- -------- --------
Income before extraordinary charge.......................... 792 6,546 14,277
Extraordinary charge, net of tax effect of $381............. -- -- 572
------- -------- --------
Net income.................................................. $ 792 $ 6,546 $ 13,705
======= ======== ========
Pro Forma Data(1):
Income before provision for income taxes....................
Pro forma provision for income taxes........................
Pro forma net income........................................
Net income per common share:
Basic before extraordinary charge......................... $ 0.09 $ 0.42 $ 0.80
Extraordinary charge...................................... -- -- 0.03
------- -------- --------
Basic..................................................... $ 0.09 $ 0.42 $ 0.77
======= ======== ========
Diluted before extraordinary charge....................... $ 0.09 $ 0.42 $ 0.74
Extraordinary charge...................................... -- -- 0.03
------- -------- --------
Diluted................................................... $ 0.09 $ 0.42 $ 0.71
======= ======== ========
Number of shares used in computing net income per share
(in thousands):
Basic..................................................... 8,691 15,630 17,864
======= ======== ========
Diluted................................................... 8,691 15,714 19,421
======= ======== ========
Other Data:
Number of offices open at end of period..................... 28 35 44
Total number of associates on assignment at end of period... 697 1,056 1,283
Resources Resources
Connection LLC Connection, Inc.
-------------------- --------------------------
May 31, May 31,
------- -------
1997 1998 1999 2000 2001
------- ------ ------- ------- -------
(unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents....................................... $ -- $3,168 $ 876 $ 4,490 $ 34,503
Working capital................................................. 1,133 4,504 7,150 7,664 42,965
Total assets.................................................... 1,409 7,976 58,954 70,106 105,345
Long-term debt, including current portion....................... -- -- 42,531 41,771 --
Stockholders' equity............................................ 1,205 4,928 10,610 17,185 86,032
________________
(1) Because Resources Connection LLC is a limited liability company, income
taxes on any income realized by Resources Connection LLC are the
obligation of its members and, accordingly, Resources Connection LLC
records no provision for income taxes. The pro forma net income for
Resources Connection LLC for periods through March 31, 1999 have been
computed as if Resources Connection LLC had been fully subject to federal
and state income taxes as a C corporation.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes. This discussion and analysis contains forward-
looking statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors including, but not limited to, those
discussed in "Risk Factors" starting on page 21 and elsewhere in this Report on
Form 10-K.
Overview
Resources Connection is a professional services firm that provides
experienced accounting and finance, human resources management and information
technology professionals to clients on a project-by-project basis. We assist
our clients with discrete projects requiring specialized professional expertise
in accounting and finance, such as mergers and acquisitions due diligence,
financial analyses (e.g., product costing and margin analyses) and corporate
reorganization and tax-related projects. In addition, we provide human resources
management services, such as compensation program design and implementation, and
information technology services, such as transitions of management information
systems. We also assist our clients with periodic needs such as budgeting and
forecasting, audit preparation and public reporting.
We began operations in June 1996 as a division of Deloitte & Touche and
operated as a wholly owned subsidiary of Deloitte & Touche from January 1997
until April 1999. In November 1998, our management formed RC Transaction Corp.,
renamed Resources Connection, Inc., to raise capital for an intended management-
led buyout. In April 1999, we completed a management-led buyout in partnership
with our investor Evercore Partners, Inc., four of its affiliates and six other
investors. In connection with the buyout, we entered into a transition services
agreement with Deloitte & Touche, whereby Deloitte & Touche agreed to provide
certain services to us at negotiated rates during the period that we maintained
our offices within their locations. We have completed the transition of all of
our offices previously located in Deloitte & Touche space. The financial
statements of Resources Connection LLC for the period from June 1, 1998 to March
31, 1999, and financial statements of Resources Connection, Inc. for all periods
thereafter, include charges for services supplied by Deloitte & Touche.
Although these transition services were negotiated at arms length, the charges
for these services may not necessarily be indicative of rates available from
third parties. Our management has been unable to determine the availability and
the cost of similar services had they been provided by third parties.
Growth in revenue, to date, has generally been the result of establishing
offices in major markets throughout the United States. We established nine
offices during fiscal 1997, our initial fiscal year, all in the Western United
States. In fiscal 1998, we established nine additional offices, which extended
our geographic reach to the Midwest and Eastern United States. For the year
ended May 31, 1999, we opened ten more offices and established a new service
line in information technology. In fiscal 2000, we established four more
domestic offices, established a new service line in human resources management
and also began operations in Toronto, Canada; Taipei, Taiwan; and Hong Kong,
People's Republic of China. In fiscal 2001, we established nine additional
domestic offices. In the first quarter of fiscal 2002, we have begun operations
in London, England. Our new service lines were introduced in a limited number of
our offices. As a result, we currently serve our clients through 41 offices in
the United States and four offices abroad.
We earn revenue primarily by charging our corporate clients on an hourly
basis for the professional services of our associates. We recognize revenue
once services have been rendered and invoice our clients on a weekly basis. Our
clients are contractually obligated to pay us for all hours billed. To a much
lesser extent, we also earn revenue if a client hires an associate onto its
permanent payroll. This type of contractually non-refundable revenue is
recognized at the time our client completes the hiring process and represented
less than 4% of our revenue in each of the following the periods: June 1, 1998
to March 31, 1999, April 1, 1999 to May 31, 1999 and fiscal 2000. In fiscal
2001, this type of revenue represented less than 3% of our revenue. We
periodically review our outstanding accounts receivable balance and determine an
estimate of the amount of those receivables we believe may prove uncollectible.
Our provision for bad debts is included in our selling, general and
administrative expenses.
13
The costs to pay our professional associates and all related benefit and
incentive costs, including provisions for paid time off and other employee
benefits, are included in direct cost of services. We pay our associates on an
hourly basis for all hours worked on client engagements and, therefore, direct
cost of services tends to vary directly with the volume of revenue we earn. We
expense the benefits we pay to our associates as they are earned. These
benefits include paid vacation and holidays; a bonus incentive plan; referral
bonus programs; group health, dental and life insurance programs; a matching
401(k) retirement plan; and professional development and career training. In
addition, we pay the related costs of employment, including state and federal
payroll taxes, workers' compensation insurance, unemployment insurance and
associated costs. Typically, an associate must work a threshold number of hours
to be eligible for all of the benefits. We recognize direct cost of services
when incurred.
Selling, general and administrative expenses include the payroll and
related costs of our national and local management as well as general and
administrative, marketing and recruiting costs. Our sales and marketing efforts
are led by our management team who are paid a salary and earn bonuses based on
operating results for our company as a whole and within each manager's
geographic market.
Results of Operations
The following tables set forth, for the periods indicated, our consolidated
statements of income data. These historical results are not necessarily
indicative of future results.
Resources Connection LLC Resources Connection, Inc.
-------------------------- -------------------------------------------------
Period from Period from
June 1, 1998 to November 16, 1998 to Year Ended Year Ended
March 31, 1999 May 31, 1999 May 31, 2000 May 31, 2001
---------------- -------------------- ------------- ------------
(amounts in thousands)
Revenue ......................................... $55,438 $15,384 $126,332 $189,752
Direct cost of services ......................... 31,253 8,618 73,541 110,811
------- ------- -------- --------
Gross profit .................................... 24,185 6,766 52,791 78,941
Selling, general and administrative expenses .... 17,071 4,274 34,648 49,964
Amortization of intangible assets ............... -- 371 2,231 2,273
Depreciation expense ............................ 118 30 285 866
------- ------- -------- --------
Income from operations .......................... 6,996 2,091 15,627 25,838
Interest expense, net ........................... -- 734 4,717 2,043
------- ------- -------- --------
Income before provision for income taxes and
extraordinary charge............................. 6,996 1,357 10,910 23,795
Provision for income taxes(1) ................... -- 565 4,364 9,518
------- ------- -------- --------
Income before extraordinary charge................ 6,996 792 6,546 14,277
Extraordinary charge, net of tax effect of $381... -- -- -- 572
------- ------- -------- --------
Net income(1) ................................. $ 6,996 $ 792 $ 6,546 $ 13,705
======= ======= ======== ========
Our operating results for the periods indicated are expressed as a
percentage of revenue below.
Resources Connection LLC Resources Connection, Inc.
------------------------ ---------------------------------------------
Period from Period from
June 1, 1998 to November 16, 1998 to Year Ended Year Ended
March 31, 1999 May 31, 1999 May 31, 2000 May 31, 2001
-------------- ------------ ------------- ------------
Revenue ............................................ 100.0% 100.0% 100.0% 100.0%
Direct cost of services ............................ 56.4 56.0 58.2 58.4
----- ----- ----- -----
Gross profit ....................................... 43.6 44.0 41.8 41.6
Selling, general and administrative expenses ........ 30.8 27.8 27.4 26.3
Amortization of intangible assets .................. -- 2.4 1.8 1.2
Depreciation expense ............................... 0.2 0.2 0.2 0.5
----- ----- ----- -----
Income from operations ............................. 12.6 13.6 12.4 13.6
Interest expense, net ............................. -- 4.8 3.7 1.1
----- ----- ----- -----
Income before provision for income
taxes and extraordinary charge .................... 12.6 8.8 8.7 12.5
Provision for income taxes(1) ...................... -- 3.7 3.5 5.0
----- ----- ----- -----
Income before extraordinary charge................... 12.6 5.1 5.2 7.5
Extraordinary charge, net of tax effect of $381...... -- -- -- 0.3
----- ----- ----- -----
Net income(1) .................................... 12.6% 5.1% 5.2% 7.2%
===== ===== ===== =====
14
_____________
(1) Because Resources Connection LLC is a limited liability company, income
taxes on any income realized by Resources Connection LLC are the obligation
of its members and, accordingly, Resources Connection LLC records no
provision for income taxes.
Year Ended May 31, 2001 compared to Year Ended May 31, 2000
Revenue. Revenue increased $63.4 million or 50.2% to $189.8 million for
the year ended May 31, 2001 from $126.3 million for the year ended May 31, 2000.
The increase in total revenue was primarily due to the growth in total billable
hours resulting from an increase in the number of associates on assignment from
1,056 at the end of fiscal 2000 to 1,283 at the end of fiscal 2001 and a 12%
increase in the average billing rate per hour. Despite the increase in rates,
the increase in revenue is primarily attributable to the increase in the number
of associates. Revenue also increased from the contribution of the nine new
offices during fiscal 2001.
Direct Cost of Services. Direct cost of services increased $37.3 million
or 50.7% to $110.8 million for the year ended May 31, 2001 from $73.5 million
for the year ended May 31, 2000. This increase was primarily the result of the
growth in the number of associates on assignment during fiscal 2001 and a 1.0%
increase in the average pay rate per hour between the two years. Direct cost of
services increased slightly as a percentage of revenue from 58.2% for fiscal
year 2000 to 58.4% for fiscal year 2001. This net increase reflects the impact
of our enriched benefit programs for associates offset by the incremental
increase in billing rate per hour compared to pay rate per hour.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $15.3 million or 44.2% to $50.0 million for
the year ended May 31, 2001 from $34.6 million for the year ended May 31, 2000.
This increase was attributable to the cost of operating and staffing the nine
new offices opened during fiscal 2001 and the growth in operations at offices
opened prior to fiscal 2001. Management and administrative headcount increased
from 224 at the end of fiscal 2000 to 290 at the end of fiscal 2001. Selling,
general and administrative expenses decreased as a percentage of revenue from
27.4% for the year ended May 31, 2000 to 26.3% for the year ended May 31, 2001.
This percentage decrease resulted primarily from improved operating leverage
experienced in offices that had been open more than one year.
Amortization and Depreciation Expenses. Amortization of intangible assets
was relatively unchanged at $2.3 million for the year ended May 31, 2001
compared to $2.2 million for the year ended May 31, 2000. In June 2001, the
Financial Accounting Standards Board, or FASB, approved SFAS No. 142, "Goodwill
and Other Intangible Assets," which supersedes APB Opinion No. 17, "Intangible
Assets". The FASB is currently finalizing this statement with an expected
issuance in July 2001. Under its proposed changes, SFAS No. 142 establishes new
standards for goodwill acquired in a business combination and eliminates
amortization of goodwill and instead sets forth methods to periodically evaluate
goodwill for impairment. We expect to adopt this statement during the first
quarter of fiscal 2002. During the year ended May 31, 2001, goodwill
amortization totaled $2.1 million.
Depreciation expense increased from $285,000 for the year ended May 31,
2000 to $866,000 for the year ended May 31, 2001. This increase reflects the
impact of the completed moves out of our former parent's office space into our
own space resulting in additional investment in furniture and leasehold
improvements, continuing growth in our number of offices and our investment in
information technology.
Interest Expense, Net. Net interest expense decreased from $4.7 million
for the year ended May 31, 2000 to $2.0 million for the year ended May 31, 2001.
This decrease is the result of the repayment of our term loan and subordinated
notes on December 20, 2000 using the proceeds from our initial public offering
of our common stock. After the repayment, we had no outstanding long-term debt
balances. The remaining net proceeds from the offering of approximately $15.3
million, as well as cash generated from operations, have been invested in money
market funds and commercial paper and are classified as cash equivalents due to
the short maturities of these investments. Interest income was $633,000 for the
year ended May 31, 2001.
15
Income Taxes. The provision for income taxes increased from $4.4 million
for the year ended May 31, 2000 to $9.5 million for the year ended May 31, 2001.
The effective tax rate remained at 40% in both fiscal years. Our effective rate
differs from the federal statutory rate primarily due to state taxes, net of
federal benefit.
Extraordinary Charge. The extraordinary charge of $572,000 (net of tax
effect of $381,000) is the result of the write-off of the net remaining balance
of unamortized debt issuance costs associated with our term loan and
subordinated debt. The approximately $38.8 million of debt was repaid in full
on December 20, 2000 using a portion of the proceeds of our initial public
offering of our common stock.
Year Ended May 31, 2000 compared to the period from November 16, 1998 to May 31,
1999
Revenue. Revenue increased $110.9 million or 720.1% to $126.3 million for
the year ended May 31, 2000 from $15.4 million for the period from November 16,
1998 to May 31, 1999. The increase in total revenue was the result of the
comparison of a full year of operations in fiscal 2000, compared to only two
months of operations following the acquisition on April 1, 1999. Prior to April
1, 1999, Resources Connection, Inc. had no substantial operations.
Direct Cost of Services. Direct cost of services increased $64.9 million
or 754.7% to $73.5 million for the year ended May 31, 2000 from $8.6 million for
the period from November 16, 1998 to May 31, 1999. The increase in direct cost
of services was primarily the result of the comparison of a full year of
operations compared to only two months of operations following the acquisition.
Direct cost of services increased as a percentage of revenue from 56.0% for the
period from November 16, 1998 to May 31, 1999 to 58.2% for the year ended May
31, 2000. During the year ended May 31, 2000, we enriched our benefit programs
for associates and more associates qualified for benefits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $30.3 million or 704.7% to $34.6 million for
the year ended May 31, 2000 from $4.3 million for the period from November 16,
1998 to May 31, 1999. The increase in selling, general and administrative
expenses was primarily the result of the comparison of a full year of operations
compared to only two months of operations following the acquisition and
partially the result of an increase in number of offices from 28 at May 31, 1999
to 35 at May 31, 2000. Selling, general and administrative expenses decreased
as a percentage of revenue from 27.8% for the period from November 16, 1998 to
May 31, 1999 to 27.4% for the year ended May 31, 2000 due to these expenses
being spread over a larger revenue base.
Amortization and Depreciation Expenses. Amortization of intangible assets
increased from $371,000 for the period from November 16, 1998 to May 31, 1999 to
$2.2 million for the year ended May 31, 2000. The increase was related to our
acquisition of Resources Connection LLC. Results for the year ended May 31,
2000 reflect a full year of amortization expense compared with only two months
subsequent to the acquisition in the period from November 16, 1998 to May 31,
1999.
Depreciation expense increased from $30,000 for the period from November
16, 1998 to May 31, 1999 to $285,000 for the year ended May 31, 2000. The
increase in depreciation expense was primarily the result of the comparison of a
full year of operations compared to only two months of operations in the period
from November 16, 1998 to May 31, 1999.
Interest Expense. Interest expense increased from $734,000 for the period
from November 16, 1998 to May 31, 1999 to $4.7 million for the year ended May
31, 2000, related primarily to debt incurred in connection with the acquisition
of Resources Connection LLC. From May 31, 1999 to May 31, 2000, the term loan
portion of the acquisition debt was reduced from $18.0 million to $16.5 million.
The balance due on the subordinated notes increased from $22.4 million as of May
31, 1999 to $25.3 million as of May 31, 2000 as we deferred interest payments
due on the subordinated debt. The outstanding balance due on the revolver as of
May 31, 1999 of $2.1 million was repaid during the first quarter of fiscal 2000;
the revolver has not been utilized since January 2000.
Income Taxes. The provision for income taxes increased from $565,000 for
the period from November 16, 1998 to May 31, 1999 to $4.4 million for the year
ended May 31, 2000. The effective tax rate decreased from
16
41.6% for the period from November 16, 1998 to May 31, 1999 to 40.0% for the
year ended May 31, 2000. Our effective rate differs from the federal statutory
rate primarily due to state taxes, net of federal benefit.
Fiscal 2000 compared to Pro Forma Fiscal 1999 (Revenue and Direct Cost of
Services)
The following paragraphs compare the revenue and direct cost of services of
Resources Connection, Inc. for fiscal 2000 to the pro forma revenue and direct
cost of service for Resources Connection, Inc. for the period from November 1,
1998 to May 31, 1999 as if our acquisition of Resources Connection LLC had
occurred on June 1, 1998.
Pro Forma Revenue. Revenue increased $55.5 million, or 78.4%, to $126.3
million in fiscal 2000 from $70.8 million in pro forma fiscal 1999. The
increase in total revenues was primarily due to the growth in the total billable
hours resulting from the increase in the number of associates on assignment from
697 at the end of pro forma fiscal 1999 to 1,056 at the end of fiscal 2000 and
an increase of 6.3% in the average billing rate per hour. Substantially all of
the increase in revenues is attributable to the increase in the number of
associates. During fiscal 2000, we opened seven new offices, introduced our
human resources management service line to certain existing markets and expanded
our recently introduced information technology service line in existing market
places. Our new service line contributed $2.3 million to revenues during the
year or 1.8% of our increase in revenue.
Pro Forma Direct Cost of Services. Direct cost of services increased $33.7
million, or 84.5%, to $73.5 million in fiscal 2000 from $39.9 million in pro
forma fiscal 1999. This increase was the result of the growth in the number of
associates on assignment from 697 at the end of pro forma fiscal 1999 to 1,056
at the end of fiscal 2000 and an increase of 5.7% in the average pay rate per
hour. Substantially all of the increase in direct cost of services is
attributable to the increase in the number of associates. In addition, we
enriched certain of our benefit programs for associates during fiscal 2000 and
more of our associates qualified for benefits. Direct cost of services as a
percentage of revenue in fiscal 2000 was 58.2% as compared to 56.4% in pro forma
fiscal 1999, reflecting primarily the impact of these enriched benefit programs.
Quarterly Results
The following table sets forth our unaudited quarterly consolidated
statements of income data for each of the eight quarters in the two-year period
ended May 31, 2001. In the opinion of management, this data has been prepared
on a basis substantially consistent with our audited consolidated financial
statements appearing elsewhere in this prospectus, and reflect and include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the data. The quarterly data should be read together with our
consolidated financial statements and related notes appearing elsewhere in this
prospectus. The operating results are not necessarily indicative of the results
to be expected in any future period.
Resources Connection, Inc.
---------------------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------------------
Aug. 31, Nov. 30, Feb. 29, May 31, Aug. 31, Nov. 30, Feb. 28, May 31,
1999 1999 2000 2000 2000 2000 2001 2001
------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
Consolidated Statements of
Income Data:
Revenue ......................................... $25,533 $28,581 $33,384 $38,834 $39,155 $45,046 $49,830 $55,721
Direct cost of services ......................... 14,491 16,626 19,765 22,659 22,749 25,987 29,457 32,618
------- ------- ------- ------- ------- ------- ------- -------
Gross profit .................................... 11,042 11,955 13,619 16,175 16,406 19,059 20,373 23,103
Selling, general and administrative
expenses ....................................... 6,813 8,050 9,365 10,420 10,720 12,493 12,680 14,071
Amortization of intangible
assets ......................................... 511 577 572 571 578 565 565 565
Depreciation expense ............................ 51 49 31 154 192 216 227 231
------- ------- ------- ------- ------- ------- ------- -------
Income from operations .......................... 3,667 3,279 3,651 5,030 4,916 5,785 6,901 8,236
Interest income................................... -- -- -- -- (19) (44) (251) (319)
Interest expense ................................ 1,154 1,186 1,199 1,178 1,228 1,184 248 16
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes and extraordinary charge .......... 2,513 2,093 2,452 3,852 3,707 4,645 6,904 8,539
Provision for income taxes ...................... 1,006 835 981 1,542 1,483 1,858 2,762 3,415
------- ------- ------- ------- ------- ------- ------- -------
Income before extraordinary charge................ 1,507 1,258 1,471 2,310 2,224 2,787 4,142 5,124
Extraordinary charge, net of tax effect of $381... -- -- -- -- -- -- 572 --
------- ------- ------- ------- ------- ------- ------- -------
Net income ...................................... $ 1,507 $ 1,258 $ 1,471 $ 2,310 $ 2,224 $ 2,787 $ 3,570 $ 5,124
======= ======= ======= ======= ======= ======= ======= =======
Net income per common share (1):
Basic............................................ $ 0.10 $ 0.08 $ 0.09 $ 0.15 $ 0.14 $ 0.18 $ 0.18 $ 0.25
======= ======= ======= ======= ======= ======= ======= =======
Diluted.......................................... $ 0.10 $ 0.08 $ 0.09 $ 0.15 $ 0.13 $ 0.16 $ 0.17 $ 0.23
======= ======= ======= ======= ======= ======= ======= =======
- -------------
(1) Net income per common share calculations for each of the quarters were based
upon the weighted average number of shares outstanding for each period, and
the sum of the quarters may not necessarily be equal to the full year net
income per common share amount.
17
Our quarterly results have fluctuated in the past and we believe they will
continue to do so in the future. We anticipate that revenues in the first
quarter of fiscal 2002 will be no more than and will likely be less than in the
quarter ended May 31, 2001. Factors that could affect our quarterly operating
results include:
. our ability to attract new clients and retain current clients;
. the mix of client projects;
. the announcement or introduction of new services by us or any of our
competitors;
. the expansion of the professional services offered by us or any of our
competitors into new locations both nationally and internationally;
. changes in the demand for our services by our clients;
. the entry of new competitors into any of our markets;
. the number of holidays in a quarter, particularly the day of
the week on which they occur;
. changes in the pricing of our professional services or those of our
competitors;
. the amount and timing of operating costs and capital expenditures
relating to management and expansion of our business; and
. the timing of acquisitions and related costs, such as compensation
charges that fluctuate based on the market price of our common stock.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not meaningful indicators of future
performance.
Liquidity and Capital Resources
Our primary source of liquidity is cash provided by our operations and, to
the extent necessary, available commitments under our revolving line of credit.
We have generated positive cash flows from operations since inception, and we
continued to do so during the year ended May 31, 2001.
In April 1999, in connection with the acquisition of Resources Connection
LLC, we entered into a $28.0 million credit agreement with Bankers Trust
Company, an affiliate of Deutsche Banc Alex. Brown Inc., U.S. Bank National
Association and BankBoston, N.A., which provides for an $18.0 million term loan
facility and a $10.0 million revolving credit facility. On December 20, 2000,
we repaid the remaining balance on the term loan of $11.9 million using the
proceeds from our initial public offering of common stock. The credit agreement
expires on October 1, 2003. As of May 31, 2001, we had no outstanding
borrowings under the revolving credit facility. Borrowings under the credit
agreement are collateralized by all of our assets. Our interest rate options
under our
18
credit agreement are prime rate plus 0.5% to 1.5% and a Eurodollar-based rate
plus 1.5% to 2.5%. Interest is payable on the revolving credit facility at
various intervals no less frequent than quarterly.
In April 1999, we issued $22.0 million of 12% subordinated promissory notes
to certain investors. Interest accrued on the notes at 12% and was payable on a
quarterly basis; however, we could elect and did elect to defer payment of the
interest and to add the balance due to the outstanding principal balance. On
December 20, 2000, we used approximately $26.9 million of the net proceeds from
our initial public offering to retire the then outstanding balance on these
subordinated promissory notes.
Net cash provided by operating activities totaled $20.9 million in fiscal
2001, $10.5 million in fiscal 2000, and $3.0 million in fiscal 1999 on a pro
forma combined basis (including $5.0 million in cash acquired in connection with
our acquisition of Resources Connection LLC). Cash provided by operations
resulted primarily from the net earnings of the company partially offset by
growth in working capital.
Net cash used in investing activities totaled $2.0 million in fiscal 2001,
$3.3 million in fiscal 2000 and $51.1 million in fiscal 1999 on a pro forma
combined basis. Other than in fiscal 1999, when we used cash to purchase
Resources Connection LLC, cash used in investing activities was a result of
purchases of property and equipment.
Net cash provided by financing activities was $11.1 million in fiscal 2001
and $50.8 million in fiscal 1999 on a pro forma combined basis, while cash used
in financing activities was $3.6 million in fiscal 2000. The net cash provided
by financing activities in fiscal 2001 reflects the payment required under our
term debt agreement following the completion of our initial public offering of
common stock, and retirement of our subordinated promissory notes, offset by the
remaining proceeds of the offering. Cash used in financing activities during
fiscal 2000 resulted from the repayment of our term debt and the net decrease in
borrowings under our revolving line of credit. Net cash generated from financing
activities in fiscal 1999 resulted from the issuance of common stock, the
issuance of subordinated promissory notes and proceeds from bank debt associated
with the purchase of Resources Connection LLC and the resultant financing of the
ongoing operations of our company thereafter.
Our ongoing operations and anticipated growth will require us to continue
making investments in capital equipment, primarily technology, hardware and
software. In addition, we may consider making certain strategic acquisitions.
We anticipate that our current cash, existing availability under our revolving
line of credit and the ongoing cash flows from our operations will be adequate
to meet our working capital and capital expenditure needs for at least the next
12 months. Our longer-term plans for expanding our business anticipate that
these sources of liquidity will be sufficient for the foreseeable future. If we
require additional capital resources to grow our business, either internally or
through acquisition, we may seek to sell additional equity securities or to
secure additional debt financing. The sale of additional equity securities or
the addition of new debt financing could result in additional dilution to our
stockholders. We may not be able to obtain financing arrangements in amounts or
on terms acceptable to us in the future. In the event we are unable to obtain
additional financing when needed, we may be compelled to delay or curtail our
plans to develop our business, which could have a material adverse affect on our
operations, market position and competitiveness.
19
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101) entitled "Revenue Recognition," which outlines the basic criteria that must
be met to recognize revenue and provides guidance for the presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC. The adoption of SAB 101 did not have a material
impact on our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, entitled
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board No. 25, or APB 25. This
interpretation clarifies:
. the definition of an employee for purposes of applying APB 25;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
. the accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and
. the accounting for an exchange of stock compensation awards in a
business combination.
This interpretation was effective July 1, 2000. The adoption of FIN 44 did
not have a material impact on our financial position or results of operations.
In June 2001, the FASB approved SFAS No. 141, "Business Combinations" and
is currently finalizing this statement with an expected issuance in July 2001.
Under its proposed changes, SFAS No. 141 establishes new standards for
accounting and reporting requirements for business combinations and will require
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method will be
prohibited. The Company expects to adopt this statement during the first
quarter of fiscal 2002. Management does not believe that SFAS No. 141 will have
a material impact on the Company's consolidated financial statements.
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other
Intangible Assets," which supersedes APB Opinion No. 17, "Intangible Assets".
The FASB is currently finalizing this statement with an expected issuance in
July 2001. Under its proposed changes, SFAS No. 142 establishes new standards
for goodwill acquired in a business combination and eliminates amortization of
goodwill and instead sets forth methods to periodically evaluate goodwill for
impairment. The Company expects to adopt this statement during the first quarter
of fiscal 2002. During the year ended May 31, 2001, goodwill amortization
totaled $2.1 million.
20
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy shares of our common stock. The risks and uncertainties
described below are not the only ones facing us. Additional risks and
uncertainties, including those risks set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", may also adversely
impact and impair our business. If any of the following risks actually occurs,
our business could be harmed. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. When
determining whether to buy our common stock, you should also refer to the other
information in this Report on Form 10-K, including our financial statements and
the related notes.
This Report on Form 10-K contains forward-looking statements based on the
current expectations, assumptions, estimates and projections about us and our
industry. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those discussed in these
forward-looking statements as a result of certain factors, as more fully
described in this section and elsewhere in this Report on Form 10-K. We do not
undertake to update publicly any forward-looking statements for any reason, even
if new information becomes available or other events occur in the future.
We must provide our clients with highly qualified and experienced associates,
and the loss of a significant number of our associates, or an inability to
attract and retain new associates, could adversely affect our business and
operating results.
Our business involves the delivery of professional services, and our
success depends on our ability to provide our clients with highly qualified and
experienced associates who possess the skills and experience necessary to
satisfy their needs. Such professionals are in great demand, particularly in
certain geographic areas, and are likely to remain a limited resource for the
foreseeable future. Our ability to attract and retain associates with the
requisite experience and skills depends on several factors including, but not
limited to, our ability to:
. provide our associates with full-time employment;
. obtain the type of challenging and high-quality projects that our
associates seek;
. pay competitive compensation and provide competitive benefits; and
. provide our associates with flexibility as to hours worked and
assignment of client engagements.
We cannot assure you that we will be successful in accomplishing each of
these items and, even if we are, that we will be successful in attracting and
retaining the number of highly qualified and experienced associates necessary to
maintain and grow our business.
The market for professional services is highly competitive, and if we are unable
to compete effectively against our competitors our business and operating
results could be adversely affected.
We operate in a competitive, fragmented market, and we compete for clients
and associates with a variety of organizations that offer similar services. The
competition is likely to increase in the future due to the expected growth of
the market and the relatively few barriers to entry. Our principal competitors
include:
. consulting firms;
. employees loaned by the Big Five accounting firms;
. traditional and Internet-based staffing firms; and
. the in-house resources of our clients.
We cannot assure you that we will be able to compete effectively against
existing or future competitors. Many of our competitors have significantly
greater financial resources, greater revenues and greater name recognition,
which may afford them an advantage in attracting and retaining clients and
associates. In addition, our competitors may be able to respond more quickly to
changes in companies' needs and developments in the professional services
industry.
An economic downturn or change in the use of outsourced professional services
associates could adversely affect our business.
Our business may be significantly affected if there is an economic
downturn. If the general level of economic activity slows, our clients may
delay or cancel plans that involve professional services, particularly
outsourced professional services. Consequently, the demand for our associates
could decline, resulting in a loss of revenues. In addition, the use of
professional services associates on a project-by-project basis could decline for
non-economic reasons. In the event of a non-economic reduction in the demand
for our associates, our financial results could suffer.
21
Our business depends upon our ability to secure new projects from clients and,
therefore, we could be adversely affected if we fail to do so.
We do not have long-term agreements with our clients for the provision of
services. The success of our business is dependent on our ability to secure new
projects from clients. For example, if we are unable to secure new client
projects because of improvements in our competitors' service offerings or
because of an economic downturn decreasing the demand for outsourced
professional services, our business is likely to be materially adversely
affected.
We may be unable to adequately protect our intellectual property rights,
including our brand name. If we fail to adequately protect our intellectual
property rights, the value of such rights may diminish and our results of
operations and financial condition may be adversely affected.
We believe that establishing, maintaining and enhancing the Resources
Connection brand name is essential to our business. We have filed an
application for a United States service mark registration of our name and logo.
We may be unable to secure this registration. We are aware of other
companies using the name "Resources Connection" or some variation thereof.
There could be potential trade name or trademark infringement claims brought
against us by the users of these similar names or trademarks, and those users
may have trademark rights that are senior to ours. If an infringement suit were
to be brought against us, the cost of defending such a suit could be
substantial. If the suit were successful, we could be forced to cease using the
service mark "Resources Connection". Even if an infringement claim is not
brought against us, it is also possible that our competitors or others will
adopt service names similar to ours or that our clients will be confused by
another company using a name or trademark similar to ours, thereby impeding our
ability to build brand identity. We cannot assure you that our business would
not be adversely affected if confusion did occur or if we are required to change
our name.
Our clients may be confused by the presence of competitors and other companies
that have names similar to our name.
We are aware of other companies using the name "Resources Connection" or
some variation thereof. Some of these companies provide outsourced services, or
are otherwise engaged in businesses that could be similar to ours. One company
has a web address that is nearly identical to ours,
"www.resourceconnection.com". The existence of these companies may confuse our
clients, thereby impeding our ability to build our brand identity.
We may be legally liable for damages resulting from the performance of projects
by our associates or for our clients' mistreatment of our associates.
Many of our engagements with our clients involve projects that are critical
to our clients' businesses. If we fail to meet our contractual obligations, we
could be subject to legal liability or damage to our reputation, which could
adversely affect our business, operating results and financial condition. It is
likely, because of the nature of our business, that we will be sued in the
future. Claims brought against us could have a serious negative effect on our
reputation and on our business, financial condition and results of operations.
Because we are in the business of placing our associates in the workplaces
of other companies, we are subject to possible claims by our associates alleging
discrimination, sexual harassment, negligence and other similar activities by
our clients. We may also be subject to similar claims from our clients based on
activities by our associates. The cost of defending such claims, even if
groundless, could be substantial and the associated negative publicity could
adversely affect our ability to attract and retain associates and clients.
We may not be able to grow our business, manage our growth or sustain our
current business.
We have grown rapidly since our inception in 1996 by opening new offices
and by increasing the volume of services we provide through existing offices.
There can be no assurance that we will continue to be able to maintain or expand
our market presence in our current locations or to successfully enter other
markets or locations. Our ability to successfully grow our business will depend
upon a number of factors, including our ability to:
22
. grow our client base;
. expand profitably into new cities;
. provide additional professional services lines;
. maintain margins in the face of pricing pressures; and
. manage costs.
Even if we are able to continue our growth, the growth will result in new
and increased responsibilities for our management as well as increased demands
on our internal systems, procedures and controls, and our administrative,
financial, marketing and other resources. Failure to adequately respond to
these new responsibilities and demands may adversely affect our business,
financial condition and results of operation.
An increase in our international activities will expose us to additional
operational challenges that we might not otherwise face.
As we increase our international activities, we will have to confront and
manage a number of risks and expenses that we would not otherwise face if we
conducted our operations solely in the United States. If any of these risks or
expenses occurs, there could be a material negative effect on our operating
results. These risks and expenses include:
. difficulties in staffing and managing foreign offices as a result of,
among other things, distance, language and cultural differences;
. expenses associated with customizing our professional services for
clients in foreign countries;
. foreign currency exchange rate fluctuations, when we sell our
professional services in denominations other than U.S. dollars;
. protectionist laws and business practices that favor local companies;
. political and economic instability in some international markets;
. multiple, conflicting and changing government laws and regulations;
. trade barriers;
. reduced protection for intellectual property rights in some countries;
and
. potentially adverse tax consequences.
We may acquire companies in the future, and these acquisitions could disrupt our
business.
We may acquire companies in the future. Entering into an acquisition
entails many risks, any of which could harm our business, including:
. diversion of management's attention from other business concerns;
. failure to integrate the acquired company with our existing business;
. failure to motivate, or loss of, key employees from either our
existing business or the acquired business;
23
. potential impairment of relationships with our employees and clients;
. additional operating expenses not offset by additional revenue;
. incurrence of significant non-recurring charges;
. incurrence of additional debt with restrictive covenants or other
limitations;
. dilution of our stock as a result of issuing equity securities; and
. assumption of liabilities of the acquired company.
We have a limited operating history as an independent company.
We commenced operations in June 1996 as a division of Deloitte & Touche.
From January 1997 through April 1999, we operated as a wholly owned subsidiary
of Deloitte & Touche. In April 1999, we were sold by Deloitte & Touche.
Therefore, our business as an independent company has a limited operating
history. Consequently, the historical and pro forma information contained in
this prospectus may not be indicative of our future financial condition and
performance.
The terms of our transition services agreement between Resources Connection and
Deloitte & Touche may not have been on terms indicative of those available from
an independent party.
As part of the management-led buyout in April 1999, we entered into a
transition services agreement with Deloitte & Touche under which Deloitte &
Touche agreed to provide certain services to us at negotiated rates until none
of our offices remained in Deloitte & Touche office space, which occurred on
August 31, 2000. The negotiated rates we agreed to pay to Deloitte & Touche
under the transition services agreement may not be indicative of the rates that
an independent third party would have charged us for providing the same
services. Specifically, an independent third party may have charged us rates
more or less favorable than those charged by Deloitte & Touche. If the terms of
the transition services agreement, particularly the rates charged by Deloitte &
Touche, were more favorable to us than those available from a third party, our
general and administrative expenses will likely increase.
Our business could suffer if we lose the services of one or more key members of
our management.
Our future success depends upon the continued employment of Donald B.
Murray, our chief executive officer, and Stephen J. Giusto, our chief financial
officer. The departure of Mr. Murray, Mr. Giusto or any of the other key
members of our senior management team could significantly disrupt our
operations. Key members of our senior management team include Karen M. Ferguson
and Brent M. Longnecker, both of whom are executive vice presidents, John D.
Bower, our vice president, finance, and Kate W. Duchene, our chief legal officer
and executive vice president of human relations. We do not have employment
agreements with Mr. Bower or Ms. Duchene.
Deloitte & Touche has agreed not to compete with us and we may be adversely
affected when the noncompete expires.
In connection with the management buy-out, Deloitte & Touche agreed not to
compete with us in a manner that replicates our business model for a period
ending on the earlier of April 1, 2003 or the date that Deloitte & Touche enters
into a significant business combination. The noncompete does not prohibit
Deloitte & Touche from using their personnel in a loaned staff capacity or from
allowing their personnel to work on a less than full time basis in accordance
with the human resources policies of Deloitte & Touche. When the noncompete
expires, we may be adversely affected if Deloitte & Touche chooses to compete in
a manner previously prohibited by the noncompete.
24
Our quarterly financial results may be subject to significant fluctuations that
may increase the volatility of our stock price.
Our results of operations could vary significantly from quarter to quarter.
We anticipate that revenues in the first quarter of fiscal 2002 will be no more
than and will likely be less than in the quarter ended May 31, 2001. Factors
that could affect our quarterly operating results include:
. our ability to attract new clients and retain current clients;
. the mix of client projects;
. the announcement or introduction of new services by us or any of our
competitors;
. the expansion of the professional services offered by us or any of our
competitors into new locations both nationally and internationally;
. changes in the demand for our services by our clients;
. the entry of new competitors into any of our markets;
. the number of holidays in a quarter, particularly the day of
the week on which they occur;
. changes in the pricing of our professional services or those of our
competitors;
. the amount and timing of operating costs and capital expenditures
relating to management and expansion of our business; and
. the timing of acquisitions and related costs, such as compensation
charges that fluctuate based on the market price of our common stock.
Due to these factors, we believe that quarter-to-quarter comparisons of our
results of operations are not meaningful indicators of future performance. It is
possible that in some future periods, our results of operations may be below the
expectations of investors. If this occurs, the price of our common stock could
decline.
We may be subject to laws and regulations that impose difficult and costly
compliance requirements and subject us to potential liability and the loss of
clients.
In connection with providing services to clients in certain regulated
industries, such as the gaming and energy industries, we are subject to
industry-specific regulations, including licensing and reporting requirements.
Complying with these requirements is costly and, if we fail to comply, we could
be prevented from rendering services to clients in those industries in the
future.
Our stock price has been volatile, and you may lose all or substantially all of
your investment.
The market price of our common stock has fluctuated widely in the past and
is likely to continue to fluctuate in the future. Fluctuations in the market
price of our common stock could occur in response to factors such as:
. loss of a significant client or group of clients;
. changes in market valuations of professional services companies;
. improvements in the outsourcing of professionals by our competitors;
and
. the introduction of new competitors in the market for outsourced
professionals.
In addition to these specific factors, companies listed on the Nasdaq Stock
Market's National Market have recently experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies listed on these markets. Our common stock is listed on
The Nasdaq Stock Market's National Market and therefore has and will be subject
to this volatility. The volatility of the market may materially adversely affect
the market price of our common stock, regardless of our actual operating
performance.
Substantial sales of our common stock by our existing investors could cause our
stock price to decline.
We have 20,792,080 shares of common stock outstanding, assuming no exercise
of options after June 30, 2001. Of this amount 8,075,990 shares are freely
tradable as of June 30, 2001, without restriction in the public market unless
purchased by "affiliates" of ours as that term is defined in Rule 144 under the
Securities Act.
If our existing stockholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options, in the
public market, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate.
Certain of our existing stockholders have the ability to exercise control over
us, and they may make decisions with which you disagree.
Under a stockholders agreement entered into prior to our initial public
offering, certain entities affiliated with Evercore Partners, L.L.C., or the
Evercore Partners, have agreed to vote their shares in favor of board nominees
designated by some of our management stockholders -- Donald B. Murray, Stephen
J. Giusto, Karen M. Ferguson and Brent M. Longnecker -- and these management
stockholders have agreed to vote their shares in favor of board nominees
designated by the Evercore Partners. Collectively, the Evercore Partners and the
management stockholders have designated five of our nine current direct